Sunday, November 7, 2010

How Bankruptcy Can Stop Foreclosure

Bill and Jill are happily married. They both work, make decent money, and pay their bills on time. They own a home together and have never been late on a payment. Financially, it appears that Bill and Jill are going to do quite well. Unfortunately, neither Bill nor Jill was immune the economic storm that swept the globe.

Bill received a letter from his boss that his job position might be eliminated and Jill's hours are being reduced because budget cuts. Like many Americans, Bill and Jill have financially planned by saving up money. Months go by, and Bill is worried that their planning didn't cover this long of a "recovery". Bill's job is becoming less secured and Jill's hours are now reduced to half of what it used to be. They've exhausted a majority of their savings, 401k, and IRA to keep up with monthly bills, including their mortgage. Inevitably, B & J run out of cash and start to fall behind on their mortgage. Several months go by, and B & J now have a foreclosure notice.

Later on, B was offered a new job with a different company. This one pays only a little more money, but it was enough that B & J can make their monthly mortgage payments. However, the bank won't stop the foreclosure process unless B & J catch up on all of their late payments. There was simply no way that Bill can pay several month of late mortgage payments to cancel the foreclosure. The bank refuses to work with Bill and told him that it will auction the house off in 90 days. What can Bill do to save his home?

Sadly, it's not a very well known fact that a Chapter 13 Bankruptcy can stop a foreclosure. A Chapter 13 Bankruptcy is the type of bankruptcy where the debtor sets up a plan to repay a portion of his/her debts. If the Plan meets all the requirements for court approval, a bankruptcy judge signs the plan into an order. The order prevents the bank from foreclosing on the debtor's property while he/she is making payments.

In a home-saving situation, the Chapter 13 plan will include a provision that requires total payments of all late mortgage payments. The debtor has up to 5 years to pay up the late mortgages. While he/she is making the payments, the bank is not allowed to foreclose on the property based on these late payments alone.

For example, if Bill's monthly mortgage payment is $1,000 and Bill is 5 months behind, his mortgage arrears is $5,000 ($1,000 x 5 months). In order to prevent the bank from foreclosing, Bill can either (1) pay the bank $5,000 to get caught up or (2) file a Chapter 13 and pay off the $5,000 over 5 years ($83.33/month). As long as Bill is paying his ongoing monthly mortgage payment on time plus the extra $83.33 (paid through Court), the bank can't foreclose. This is likely how Bill will save his home.

All of this can be confusing because a Chapter 13 Plan requires a great deal of legal engineering before the Court will approve it. If you know anyone who is losing their home and they want to save it, you should point them to a bankruptcy attorney before it's too late.

46 comments:

reading through this entry, I never knew that bankruptcy can be so complicated. is the Chapter 13 Plan the exact same as the Chapter 13 Bankruptcy? what do the chapters mean? thanks for this great info! :)

Hey I'm a follower of Steph and was wondering if you know anything about Mylotarg being withdrawn from the US. It is a pfizer drug for cancer treatment but apparently increased death rate dramatically. A loved one of mine passed away recently after treatment of Mylotarg for ALS. Is there anything we can do about this?

This blog post couldn't have come at a better time, haha. I am currently in economics class and I am writing a paper about purchasing a home and what factors play into that. This was so educational and just what I needed.

Oh wow. This is very informative! I guess bankruptcy has that negative connotation of failure and defeat, but I had no idea that it may be able to save your home. Thank you for this blog post! I will make sure to keep this all in mind just in case I will need to know in the future. :)

In all honesty I think sometimes we all take our jobs for granted, so sure that our positions will still be there twenty years from now. We live in an economy that changes everyday and I think sometimes people are more into the materialistic things inside the house, than the actual house itself. I feel for B&J but I wanna say that if you double up one mortgage payment a year it can knock off as much as five years off the amortization of your house. And if you increase the mortgage payments by 10% each year, your house will slowly get paid off faster than you ever thought possible. Of course the banks don't tell you this, and it's a shame that they work against the public rather than with the public, that's why I'm glad there are people out there like you Minh, who have the publics best interest at heart. Thank you!!

Definitely a good tip from you. Thanks! One of my friends parents is going through a short sale now on their home. Can they still back out and file for Chapter 13 instead or is it too late? They also own a restaurant so will that affect their ownership? Gonna pass this info on to them.

oh my god, my boyfriend's family had to foreclosed their house 2 years ago because of the same issues as "Bill and Jill"...if i only knew about chapter 13 and tell them about it, it would save so much worry and time. *sigh* i guess i'm 2 years too late to tell them about it. but thank you for informing everyone these issues, it really can be helpful in case of futures problems.

I love your blog because in 2 years I plan to attend law school. I know I want to become a judge, though I do not know what kind of law I want to practice in between time.I have considered the more business end (tax, bankruptcy, corporate etc.) however, I do not know if this would be the kind of law to get into if I one day want to become a judge. What do you think?

I also love that your blog does a good job in explaining different kinds of situations that your law firm may deal with. A lot of people don't know their options, and because legal consultations can be so expensive, many people are simply unaware of their options.By posting things like this on a blog where it is more easy to access by more people, I really think you will be helping a lot of people. Almost like pro-bono work, but with advice! haha

Sometimes I feel like I spend a lot of time with following blogs, (beauty and fashion mainly) and though I really love it and enjoy it, I also feel like it would be so great if I could read blogs that I learn law, government, politics, etc. from since that will really help me in the future!This is exactly what your blogs does for me-Thanks!

I love the "story". haha American law is very interesting..I wonder how similar it is to the laws here in Canada. I think I know more about American law and politics than any other country's! Thanks for the info!! I actually learned most of it from your website..I read every single word on your site. haha I actually saved a little document with a bunch of corrections/suggestions I have for your website. If you have the time, you can send me an email at jessycow.blog at gmail dot com. I was going to send one to the email address you provided on your site, but I wasn't sure who had access to that email. : )

Thanks for sharing this information. :D You did the math and well written down in its simplest form. :) Like others, I also wondered if filing for bankruptcy stays on your record and does it give you bad credit? Or does it make it harder to apply for future loans and etc?

I like how this was written. Very simple, concise, and absolutely no way the reader can get any facts wrong. One of the greatest qualities a bankruptcy lawyer can have is the ability to communicate to their clients in a way to not only make them understand but to calm them.

WOW! Thank you for the information. If I know anyone that has this problem i will for sure tell them about this post or have them read this. I love coming on here reading law stuff now! =) Its so interesting.

Interesting.. some family friends had a similar situation.. but i don't think they filed for chapter 13.. because they ended up with a foreclosure.. they got laid off, but found a job several months later as well.. i think if they had known this, they would have definitely filed instead of getting into foreclosure.. its very sad, our economy now..

The start of this blog post made me think I was reading a scenerio for my midterm. Lol, talk about fun! I'm not complaining, I found this post to be quite interesting. I shall forward this blog off to a friend of mine who is going through possible foreclosure. Unfortunately, things like this happens frequently, but on the other side of the spectrum it keeps you employeed. =D

It's nice that you put it into simple terms. People try to talk to you like your an idiot and you never really get the answer your looking for. This was a great blog and a great way to show that sometimes it's not as complicated as others make it out to be. I hope I'm never into this situation.

As always, your explainations always make more sense than reading it from a text :) Bankruptcy is so complicated and it's unfortunate how many "stable" people will become unstable with the questioning economy. Thanks, Minh! :)

Thank you for the very informative post on how a Chapter 13 Bankruptcy can stop a foreclosure. I'm not at the age to worry about these circumstances and my parents aren't in this situation either but I've learned a couple of things from reading this post. Not many Lawyers out there have time to share their knowledge with the public, so good for you! I'm looking forward to learning more! :)

What's the likelihood that one be approved by the court for filing chapter 13? What if Bill (in the example above) is $10,000 or more behind on his mortgage pmt? Is 5 the maximum of years that he's allowed to pay the bank back? What should he do if he can't even afford the monthly pmt that's set by the court? Bankruptcy does seem really complicated, and is interesting as well. Thank you for starting this blog to share with your readers. I'm looking forward to your next post.

Always so informative :) I think you have a knack for the laws, which is great! Bankruptcy is such a burden for many people, even when they try their hardest in this tough economy. At least keeping your home would be a good thing :)

I like reading through your blog posts because it gives me so much info that I have never known before. I wouldn't have known what to do if I ever was put in this situation...and now I do. Thanks for this post!

I started following your blog recently, and this is really interesting! I actually showed my parents some of your posts and they've started to follow some of your tips/advice. They think the info on here's amazing, and it's not too complicated to understand since their English skills aren't that great haha :) Thanks a bunch!(:

Thanks for the info Minh. My husband actually went through this when he and I first got married. His ex wife racked up their bills so much that he had to file bankruptcy. We would of really like to keep the place but his lawyer didn't sign some papers or failed to file something and he ended up having to file Chp. 7 instead. We agreed since he has his ex owned this home once before that it would j ust seem weird anyways.

i went to a bankruptcy firm near my house and they told me that if i do declare for a bankruptcy, then the bank will definitely take away my home, so what is the difference with this type of declaration?

(i am not filing for it, it was for a friend)--honestly, isn't me, but i would like to know to help him out

It's a shame to see how people have always been responsible with their debt, and yet because of the crisis can not update and pay, and cause bankruptcy. Especially when the financial advantage of this situation.

yes, i am in the the u.s. in georgia. my friend and i went to speak with a lawyer and they told him that if he filed for bankruptcy, then he would lose his home. he has had this house for a long time now, but i do not know how much equity the property has

I never knew that bankruptcy could stop foreclosure. That's kind of weird though, almost counter-intuitive don't you think since the whole point of bankruptcy is to surrender all your assets?

If i know anybody in foreclosure I would definitely tell them about this...although I think it is a really hard step to go into bankruptcy (not legally, I mean mentally). I know the stigma behind it is much less than before and a lot of people have actually done it...but I personally wouldn't treat it lightly.

There's so much I don't know about stuff like this. Like mortgages, homeowning, etc. I know I've said this before on your posts but these really do help. Especially since I'm still in college so it's good to know what problems I could potentially run into so I can try to prevent it or prepare for it

I love your blog.I read your maximum of posts and i always found them interesting and impressive.The knowledge shared by all the post are good enough to acquire the whole information such as in the above post i get good information about the Bankruptcy aspects to stop foreclosure.file for bankruptcy

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About Me

Hello, I'm an attorney in Washington state. My offices are in Seattle and Everett.
I practice consumer bankruptcy, creditors rights, legal issues involving foreclosure and short sales, other civil matters in both the federal and state level.

I also handle business transactional and immigration law, though my practice lately resolves around consumer bankruptcy due to our unfortunate economy.

Thank you for visiting! Feel free to contact me if you need any help or have any questions.